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The nasty politics of recessions

What’s at stake: The intricately intertwined relationship between the global economy and politics has resurfaced as the Great Recession appears to have lead to a rise in political extremism. Kevin O’Rourke notes that our Great Recession has strengthened the political extremes in Europe in a way similar to what happened during and after the Great […]

By: Date: September 27, 2010 Topic: Global economy and trade

What’s at stake: The intricately intertwined relationship between the global economy and politics has resurfaced as the Great Recession appears to have lead to a rise in political extremism.

Kevin O’Rourke notes that our Great Recession has strengthened the political extremes in Europe in a way similar to what happened during and after the Great Depression. The bestseller on Amazon.de is Thilo Sarrazin’s anti-immigrant screed, which Amazon helpfully bundles with a book on young delinquents. In France, the government has been fishing in National Front waters, expelling Roma and linking immigrants with crime. In the Netherlands, Geert Wilders’ anti-Muslim party’s vote in 2006 was 5.9%; in Denmark, that of the Fokeparti was 13.9% in 2007, a huge number compared to the Nazi vote in 1928. For the US, Mark Thoma wonders if we’ve lately headed toward a period of extremism with the success of the Tea Party and where that might lead us. Andrew Leonard notes that perhaps it may be too soon to be making National Front/Tea Party connections, although listening to the way leading Republicans are talking about Islam today suggests that a reluctance to connect such dots betrays a certain over-caution. But the more fundamental point is clear: A government failure to aggressively deal with unemployment, combined with a decades-long trend of increasing income equality, has created fertile ground for extremist, populist rage. And it also applies to the US.

Markus Brückner and Hans Peter Grüner argue that a one-percentage-point decline in growth leads to a one-percentage-point increase in the vote share for right-wing or nationalist parties. The authors also find that the amount of income inequality in a country affects the role that growth plays. Highly unequal countries display a lower growth effect than more equal countries. For countries with a more equal distribution of income, a one percentage point drop in the growth rate may increase the vote share of far right parties by up to two percentage points. Their results suggest that countries should not expect right-wing parties to get majorities unless growth declines quite as much as in the 1920s. Nevertheless, even with a less significant fall in economic growth rates, a rise in support for extreme parties is likely to change political outcomes – for example through their impact on incumbent parties’ political platforms.

Paola Giuliano and Antonio Spilimbergo show in a recent NBER working paper that generations growing up during recessions have different socio-economic beliefs than generations growing up in good times. The authors study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, they find that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, they find that recessions have a long-lasting effect on individuals’ beliefs.

Ian Bremmer, president of political risk consultancy Eurasia group, notes that populism can easily breed protectionism in any country with significant exposure to international markets. If one country finds political advantage in throwing up a wall to protect a vulnerable industry or economic sector, other governments will have a political incentive and justification to do the same.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

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A textbook condition of international finance breaks down. Economic research identifies the interplay between divergent monetary policies and new financial regulation as the source of the puzzle, and generates concerns about unintended consequences for financing conditions and financial stability.

By: Konstantinos Efstathiou and Bruegel Topic: Banking and capital markets Date: July 1, 2019
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The June Eurogroup meeting: Reflections on BICC

The Eurogroup met on June 13th to discuss the deepening of the economic and monetary union (EMU) and prepare the discussions for the Euro Summit. From the meeting came two main deliverables: an agreement over a budgetary instrument for competitiveness and convergence and the reform of the European Stability Mechanism (ESM) treaty texts. We review economists’ first impressions.

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The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou and Bruegel Topic: Macroeconomic policy Date: June 17, 2019
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The inverted yield curve

Longer-term yields falling below shorter-term yields have historically preceded recessions. Last week, the US 10-year yield was 21 basis points below the 3-month yield, a feat last seen during the summer of 2007. Is the current yield curve a trustworthy barometer for future growth?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 11, 2019
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The 'seven' ceiling: China's yuan in trade talks

Investors and the public have been looking at the renminbi with caution after the Trump administration threatened to increase duties on countries that intervene in the markets to devalue/undervalue their currency relative to the dollar. The fear is that China could weaponise its currency following the further increase in tariffs imposed by the United States in early May. What is the likelihood of this happening and what would be the consequences for the existing tensions with the United States, as well as for the global economy?

By: Inês Goncalves Raposo and Bruegel Topic: Global economy and trade Date: June 3, 2019
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The next ECB president

On May 28th, EU heads of state and government will start the nomination process for the next ECB president. Leaving names of possible candidates aside, this review tries to isolate the arguments about what qualifications the new president should have and what challenges he or she is likely to face.

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The latest European growth-rate estimates

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Is an electric car a cleaner car?

An article published by the Ifo Institute in Germany compares the carbon footprint of a battery-electric car to that of a diesel car, and argues a higher share of electric cars will not contribute to reducing German carbon dioxide emissions. Respondents rejected the authors’ calculations as unrealistic and biased, and pointed to a series of studies that conclude the opposite. We summarise the article and responses to it.

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All eyes on the Fed

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Is this blog post legal (under new EU copyright law)?

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By: Catarina Midões Topic: Macroeconomic policy Date: April 8, 2019
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Secular stagnation and the future of economic stabilisation

Larry Summers’ and Łukasz Rachel’s most recent study documents a secular fall in neutral real rates in advanced economies. According to the authors, this fall would be even more marked in the absence of offsetting fiscal policies. Policymaking in a world of permanently low interest rates may be hard to navigate, especially in troubled waters. We review economists’ views on the matter

By: Inês Goncalves Raposo and Bruegel Topic: Macroeconomic policy Date: April 1, 2019
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